Want to save for education? Make 2016 ESA contributions by December 31

There are many ways to save for a child’s or grandchild’s education. But one has annual contribution limits and if you don’t make a 2016 contribution by December 31 the opportunity will be lost forever. We’re talking about Coverdell Education Savings Accounts (ESAs).

How ESAs work

With an ESA you contribute money now that the beneficiary can use later to pay qualified education expenses:

Although contributions aren’t deductible plan assets can grow tax-deferred and distributions used for qualified education expenses are tax-free.

You can contribute until the child reaches age 18 (except beneficiaries with special needs).

You remain in control of the account – even after the child is of legal age.

You can make rollovers to another qualifying family member.

Not just for college

One major advantage of ESAs over another popular education saving tool the Section 529 plan is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Another advantage is that you have more investment options. So ESAs are beneficial if you’d like to have direct control over how and where your contributions are invested.

Annual contribution limits

The annual contribution limit is $2000 per beneficiary. However the ability to contribute is phased out based on income.

The limit begins to phase out at a modified adjusted gross income (MAGI) of $190000 for married filing jointly and $95000 for other filers. No contribution can be made when MAGI hits $220000 and $110000 respectively.

Maximizing ESA savings

Because the annual contribution limit is low if you want to maximize your ESA savings it’s important to contribute every year in which you’re eligible. The contribution limit doesn’t carry over from year to year. In other words if you don’t make a $2000 contribution in 2016 you can’t add that $2000 to the 2017 limit and make a $4000 contribution next year.

However because the contribution limit applies on a per beneficiary basis before contributing make sure no one else has contributed to an ESA on behalf of the same beneficiary. If someone else has you’ll need to reduce your contribution accordingly.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s – or grandchild’s – education expenses? Contact us!

Quickbooks Consulting

Our Certified QuickBooks ProAdvisors have completed a rigorous and comprehensive curriculum developed by Intuit.

Lindemeyer's advisors understand the challenges you face and can offer guidance on everything from complex accounting questions and payroll interpretation to mastering advanced features of QuickBooks. Find out how our ProAdvisors can help.